For the first nine months of the year (1/1/17 – 9/30/17), Sandhill’s Concentrated Equity Alpha (CEA) product returned 20.6% net of fees vs. the S&P 500 Index’s return of 12.5%.

Over the last year and three quarters (1/1/16 – 9/30/17), Sandhill’s Concentrated Equity Alpha (CEA) product has returned 41.7% net of fees vs. the S&P 500 Index’s return of 23.2%.

Going forward

The structure of our client portfolios over the last year has gotten more defensive. The reason for our more defensive stance is asset valuation. Our economy is healthy, interest rates remain low, and investors are willing to pay up for assets.

While we spend most of our time looking for great companies that will prosper over the next three to five (or longer) years, we also pay attention to the price we pay to own and partner with these companies.

In getting more defensive, we have increased the number of companies in our CEA portfolios to 31 from 23 – 24 a year ago. We think the broader diversification will act as a better shock absorber should there be a meaningful correction in the market.

The other step we have taken is to trim positions where the company’s valuation is too high relative to its near to mid-term earnings power.

Our perspective

When we come to work every day, much of what has happened in the past is not relevant. We look at the companies that we (you) own, where we think the world is going, and try to measure whether we can make a meaningful return on those investments in the context of today and tomorrow’s world. Our view is always three to five years forward with much more emphasis on what we believe the company can accomplish rather than where we are in any given stock market/economic cycle.

The investment team

The investment team works very hard and does a terrific job of understanding and communicating with the companies that we buy for our clients. We spend a lot of time learning and that makes our work engaging and interesting. We also spend a lot of time talking to the CEOs, CFOs, and corporate officers of our portfolio companies in order to understand how these companies compete and operate in their industries.

Fixed income

For the first nine months of the year (1/1/17 – 9/30/17), Sandhill’s Corporate Bond product returned 3.8% net of fees vs. the Bank of America Merrill Lynch 3-5 Year Corporate Bond Index return of 3.5%.

Over the last year and three quarters (1/1/16 – 9/30/17), Sandhill’s Corporate Bond product has returned 10.1% net of fees vs. the Bank of America Merrill Lynch 3-5 Year Corporate Bond Index return of 7.2%.

The duration (maturity) of our Corporate Bond Product is four years and the weighted average yield to maturity is 3.7%. We have no credit problems. By comparison, the four year treasury today (10/5/17) yields approximately 1.8%.

As the Federal Reserve looks poised to raise interest rates (again) in December, we are well positioned with our short term, highly diversified corporate bond holdings.

Asset flows

In the first nine months of 2017, Sandhill’s asset base increased $200 million. We now have $953 million in customer assets under management.

Our move

We will soon be moving to our new home in the top floor of the south tower in Fountain Plaza. We have been working hard to design a tasteful and functional space that will work well for our clients and the team at Sandhill. While our home at 360 Delaware has been great, we have outgrown it. We will give everybody appropriate notice.

Conclusion

I believe we are well positioned as we move forward. Given the increased diversification of our equity portfolios and the short term duration of our bond portfolios, I am comfortable that we are properly addressing risk as well as return.

There will be corrections, cycles, recessions, and events that have a short term negative effect on the capital markets, but the dynamic and compelling nature of man’s ability to innovate and our country’s structure of (mostly) free markets will continue to drive substantial return over time for those who invest in the right assets and are patient.

With regards,

Edwin M. “Tim” Johnston III

Founder, Managing Partner

This report has been prepared for informational purposes only and is neither a solicitation to buy or sell securities. The information in this report has been obtained from sources believed to be accurate; however, Sandhill makes no guarantee as to the accuracy or completeness of the information. Sandhill Investment Management (“Sandhill”) is a registered investment advisor with the Securities and Exchange Commission that is not affiliated with any parent company. Individual results may vary. Investments may not be suitable for all investors. Performance may be materially affected by market and economic conditions. Investment strategy has the potential for profit or loss. The performance statistics disclosed above are calculated on the rates of return from accounts managed by Sandhill, as defined below. The U.S. dollar is the currency used to express performance. Composites includes discretionary accounts under management from the first full month at which the account’s capital is fully invested by Sandhill. Closed accounts are included in the composites through the completion of the last full month under management and are not removed from the historical rates of return. Performance presented net-of-fees is reduced by investment management fees, trading expenses, and administrative fees. Interest, dividends and capital gains in Sandhill Composites are not immediately reinvested. CEA includes all portfolios in the all-cap core strategy which may hold large, mid, and small capitalization U.S. common stocks, American Depositary Receipts (A.D.R.’s), domestic ETF’s, sector ETF’s, and cash. The S&P 500 Index is a float-adjusted market cap-weighted index of 500 of the largest US common stocks. The Corporate Bond composite will generally invest in securities rated single B to single A and will have maturities of three to nine years. The Bank of America Merrill Lynch 3-5 year Corporate Bond Index is a subset of the Bank of America Merrill Lynch US Corporate Master Index tracking the performance of US dollar denominated investment grade rated corporate debt publically issued in the US domestic market. Referenced benchmarks are not available for direct investment. Sandhill claims compliance with the Global Investment Performance Standards (GIPS®). For a full GIPS ® compliant presentation and/or the Firm’s list of composite descriptions, please call 716-852-0279.

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